ExxonMobil (XOM 0.64%) is probably the most widely recognized energy company in the U.S. That's both a good thing and a bad thing as this bellwether tries to navigate an industry that is known for its volatility and dirty image. Halfway through 2022, it is pretty clear that there's a big tailwind here. But it is equally obvious that there's also a lingering problem that management is trying to deal with. Here's what you need to know.
A lofty green flag
Oil and natural gas prices are notoriously volatile and prone to swift and dramatic swings. In 2020, which was just two years ago, the price of West Texas Intermediate crude actually fell below zero for a brief moment. That was during the coronavirus pandemic and there were other technical factors involved, but it was a dramatic and historic event. And yet, in mid-2022, oil is trading around $100 per barrel.
Although that could clearly change (see: the recent one-day oil price drop of nearly 10%), right now relatively high prices are a huge benefit for Exxon. To put some numbers on that, the company lost $0.33 per share in 2020. As oil prices rebounded it earned $5.38 per share in 2021. In the first quarter of 2022, meanwhile, the company posted adjusted earnings of $2.07 per share, up from $0.65 in the same period of 2021.
Simply put, if oil prices remain elevated, 2022 is going to be a very good year for the global energy giant. Equally important, the big earnings numbers here will help Exxon fund its capital spending plans -- which brings us to the negative news.
The long-term red flag
In the first quarter, Exxon spent $4.9 billion on capital investments, most of which was in the oil and gas exploration space. The full-year 2022 spending goal is between $21 billion and $24 billion, so there's a lot more cash set to be deployed as the year progresses.
The worry here shows up when you compare Exxon's capital expenditure history to that of its closest peer, Chevron (CVX 0.52%). Essentially, Chevron spent heavily on new investments in the last decade and now it is benefiting from that spending. Exxon didn't put as much cash to work and now it is spending more heavily to keep its oil production up. It is not uncommon to see an oil company in a position like this, noting that Exxon tends to invest counter-cyclically. But that doesn't change the fact that Exxon is dealing with a sizable production issue.
To put some numbers on that, Chevron's oil equivalent production increased slightly each year between 2019 and 2021 while Exxon's fell in each of those three years. Over the span, Exxon's production was off by around 6%, which is a pretty notable drop. To be fair, Exxon's spending is easy to do right now, with oil prices high, but if oil prices were to fall, the costs would be more difficult to cover.
XOM Capital Expenditures (TTM) data by YCharts.
That's not to suggest that Exxon can't spend its way to better days. It has a strong balance sheet with low leverage, so there's really not much reason to worry about these expenses over the long term. However, in the near term, the need for elevated capital investment does pose a risk relative to other investment options in the energy patch. It really boils down to owning a company that is positioned well today (Chevron) and one that is still trying to stem a longer term production decline (Exxon).
This, too, shall pass
Exxon is using the good news of high energy prices to help it deal with the bad news of elevated capital spending needs. It should get past that red flag over time. The problem is that, while this is happening, the energy sector is increasingly dealing with investor demands for a shift toward a greener future. That costs money, too, and makes life harder for Exxon, as there's only so much money to go around. It is a well-run oil company, but right now it looks like other oil names, such as Chevron, might be better positioned for the future.
